The Poway Unified School District in California is facing a whopping $1 billion repayment on a loan of just $105 million. It borrowed the money using bonds that the state treasurer has compared to payday loans -- and more than 200 other California districts are in the same boat.

More than 200 school districts across California are taking a second look at the high price of the debt they've taken on using risky financial arrangements. Collectively, the districts have borrowed billions in loans that defer payments for years  leaving many districts owing far more than they borrowed.

In 2010, officials at the West Contra Costa School District, just east of San Francisco, were in a bind. The district needed $2.5 million to help secure a federally subsidized $25 million loan to build a badly needed elementary school.

Charles Ramsey, president of the school board, says he needed that $2.5 million upfront, but the district didn't have it.

"We'd be foolish not to take advantage of getting $25 million" when the district had to spend just $2.5 million to get it, Ramsey says. "The only way we could do it was with a [capital appreciation bond]."

Those bonds, known as CABs, are unlike typical bonds, where a school district is required to make immediate and regular payments. Instead, CABs allow districts to defer payments well into the future  by which time lots of interest has accrued.

In the West Contra Costa Schools' case, that $2.5 million bond will cost the district a whopping $34 million to repay.

'The School District Equivalent Of A Payday Loan'

Ramsey says it was a good deal, because his district is getting a brand-new $25 million school. "You'd take that any day," he says. "Why would you leave $25 million on the table? You would never leave $25 million on the table."

But that doesn't make the arrangement a good deal, says California State Treasurer Bill Lockyer. "It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for," Lockyer says. "So you don't pay for, maybe, 20 years  and suddenly you have a spike in interest rates that's extraordinary."

Lockyer is poring through a database collected by the Los Angeles Times of school districts that have recently used capital appreciation bonds. In total, districts have borrowed about $3 billion to finance new school construction, maintenance and educational materials. But the actual payback on those loans will exceed $16 billion.

Some of the bonds can be refinanced, but most cannot, Lockyer says.

Perhaps the best example of the CAB issue is suburban San Diego's Poway Unified School District, which borrowed a little more than $100 million. But "debt service will be almost $1 billion," Lockyer says. "So, over nine times amount of the borrowing. There are worse ones, but that's pretty bad."

A Statewide Problem

The superintendent of the Poway School District, John Collins, wasn't available for comment. But he recently defended his district's use of capital appreciation bonds in an interview with San Diego's KPBS Investigative Newsource.

"Poway has done nothing different than every other district in the state of California," Collins told the program.

And he's right. In some cases, districts are on the hook to pay back anywhere between 10 and even 20 times the amount they borrowed.

But Lockyer says it distresses him to hear school officials defend these bonds.

"It's so irresponsible, that if I were on a school board  which I was, 40 years ago  I would get rid of that superintendent," Lockyer says.

Back in the '90s, the state of Michigan banned capital appreciation bonds altogether. But Lockyer says California needn't go that far. He supports a series of reforms such as capping the payback of debt to four times the amount borrowed. Otherwise, says Lockyer, these bonds will be paid well into the future, by the children of today's students.

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.

Sloppy reporting. No mention is made about the interest rate and only a couple indefinite references to the length A ten times payout 30 years later would be just under 8%. If it is 40 years it would be just under 6%. Depending on when these were issued, like around 1980, those could have been great rates.

7
posted on 12/07/2012 4:13:51 PM PST
by KarlInOhio
(Big Bird is a brood parasite: laid in our nest 43 years ago and we are still feeding him.)

The people running these schools (and the whole country) are just stupid. BLINDLY stupid. They want to pretend that they had nothing to do with this. These school districts have attorneys who review bond proposals, don’t they? These things get debated and all that by the school board don’t they?

They couldn’t be bothered to look at the fine print? These people are the cream of the crop?

Bonds... lets pass it and find out whats in it!

Of course they blame the terms of the bonds, they can’t admit they were blithering stupid. If these people had any honor they would resign en masse and beg forgiveness of the local-district taxpayers.

They probably highlighted that bond as a reason to be re-elected didn’t they? Now, it’s not their fault - someone else did it. The issue they likely praised to get elected will now be the “we was robbed” issue to run for election next time.

Exactly.These are pure discount instruments designed to get around statutory borrowing limits because only the initial payment counts against the debt limit of the municipality for credit rating purposes.

Well if I were a lender I’d want pretty high interest rates to lend to a California political entity too. There is no telling whether those commies will ever pay their debts. What was it Lenin once said... “for the loans you gave us, we forgive you”.

There is no way, no way on earth, that politicians, much less local goofballs operating in boring little town council meetings that nobody pays attention to, should be allowed to encumber their constituents this way. No way. This is a failure of 6th grade mathematics.

Gotta feed that PENSION PIG. More fundraisers ahead!! That’s a LOT of See’s Candy to bridge that gap. LOL!!! Or maybe time for another Proposition on the Ballot to raise taxes for ‘THE KIDS’.. Yes, do it for ‘THE CHILDREN’.. /s

Did they go to one of those ‘Payday Loan’ places for the loan? ROFL! I bet each and every one of their classrooms has one of those expensive/fancy ‘smartboard’ things, and every student has an iPad for their “studies”.....

Those idiot politicians, and the morons that voted for them obviously deserve whatever they get. I hope they have to go bankrupt! (they probably already ARE, just not on paper quite yet)

Ramsey says it was a good deal, because his district is getting a brand-new $25 million school. "You'd take that any day," he says. "Why would you leave $25 million on the table? You would never leave $25 million on the table."

Back in the '90s, the state of Michigan banned capital appreciation bonds altogether. But Lockyer says California needn't go that far. He supports a series of reforms such as capping the payback of debt to four times the amount borrowed.

I call BS on these numbers. Unless there were derivatives involved I cant see how these could compound so much.

Read the article again.

Those bonds, known as CABs, are unlike typical bonds, where a school district is required to make immediate and regular payments. Instead, CABs allow districts to defer payments well into the future  by which time lots of interest has accrued.

They made no payments for years on either interest or principle, so the interest just begins compounding on itself as well as on the principle. In essence, they not only didn't make any payments for whatever the term was, but also borrowed the interest on that principle every month at the same interest rate.

They were idiots to take out those kind of loans, and what ever oversight agency they might have were idiots to allow them to do that.

Without a doubt. Has the same feel as the Jefferson County Alabama case, where something very similar went down with their new sewer system.(obviously the very best over a billion dollars could buy lol). If you aren't familiar with it, please Google it for some additional entertainment. When crooked politicians meet crooked bankers, very bad things tend to happen for the tax payers.

The sad thing is that these school districts are where the kids learn things like “economics” and other ways to screw yourself and your neighbors by increasing the amount of taxes it takes to support their sorry a$$e$..

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